Mean-Variance Portfolio Selection with Reference Dependent Preferences
AbstractWe study S-shaped utility maximization for the standard portfolio selection problem with one risky and one risk-free asset. We derive a mean-variance criterium of choice, which preserves reference dependence and the reflection effect. Subsequently, we study diversification possibilities and obtain the demand for the risky asset. We close the paper with an alternative interpretation of the criterium in terms of target-based decision making.
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Bibliographic InfoPaper provided by Department of Applied Mathematics, Università Ca' Foscari Venezia in its series Working Papers with number 150.
Length: 19 pages
Date of creation: Apr 2007
Date of revision:
portfolio selection; S-shaped utility; prospect theory; reference point; mean-variance analysis; demand for the risky asset; target-based decisions.;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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- Erio Castagnoli & Marco LiCalzi, 2005. "Expected utility without utility," Game Theory and Information, EconWPA 0508004, EconWPA.
- Herbert Simon & Lindsay McSweeney, 2010. "A Behavioral Model of Rational Choice," CPI Journal, Competition Policy International, Competition Policy International, vol. 6.
- Pyle, David H & Turnovsky, Stephen J, 1970. "Safety-First and Expected Utility Maximization in Mean-Standard Deviation Portfolio Analysis," The Review of Economics and Statistics, MIT Press, vol. 52(1), pages 75-81, February.
- Marco LiCalzi, 2005. "A language for the construction of preferences under uncertainty," Game Theory and Information, EconWPA 0509002, EconWPA.
- de Farias Neto, Joao Jose, 2008. "S-shaped utility, subprime crash and the black swan," MPRA Paper 12122, University Library of Munich, Germany.
- Sergiy Gerasymchuk, 2008. "Asset return and wealth dynamics with reference dependent preferences and heterogeneous beliefs," Working Papers, Department of Applied Mathematics, UniversitÃ Ca' Foscari Venezia 160, Department of Applied Mathematics, Università Ca' Foscari Venezia.
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